Question #58
Reading: Reading 20 Discounted Dividend Valuation
PDF File: Reading 20 Discounted Dividend Valuation.pdf
Page: 23
Status: Correct
Correct Answer: A
Question
Financial models such as the DDM represent a cornerstone of equity valuation from an academic standpoint. But in the real life, many analysts do not use the DDM. The least likely reason for this is:
Answer Choices:
A. the model lacks the flexibility required to model values in the real world
B. modern research has shown that many of the old standbys do not work
C. some of the assumptions required are impractical
Explanation
The DDM requires assumptions that many analysts find impractical. In addition, the model
lacks the flexibility to adapt to changing circumstances. Both of these problems can be
overcome, to a large extent, by using spreadsheet modeling to forecast cash flows and
other variables.